Today’s low interest rates offer an excellent opportunity for startups seeking funding, says Mason Cole, co-founder of Cole Sadkin, LLC. The firm, which has offices in Chicago and New York, is unique in that it represents both a stable of 10-15 investors and a variety of startup companies.
“Today’s historically low interest rates—as low as 4-1/2 percent—offer a real opportunity for startups seeking funding,” Cole says.
He also points out that investors are better able to take advantage of these low rates than startups because they have established credit histories.
“Money is cheaper for investors,” he says. “They have the history that startups don’t have, and this makes it easier for them to get the cheap money.”
When asked how startups should go about finding the right VC firm, Cole says the first question is: Should they go to a VC?
Too often startups go to VC firms too early in the process, Cole says, and that costs them in ownership of their own company and/or the cost of a loan.
Cole points out that it’s important to have some key things in place before looking for investment, such as:
- Patents and other protections for intellectual property
- Management team
- Business plan
- Some track record that indicates likelihood of success
Frequently, an entrepreneur will go to an investor to pitch an idea, and doesn’t have a patent so that he owns the intellectual property.
“It’s easy for the investor to go to his own developers and say, ‘Here’s a good app idea—create this for us,’” says Cole.
Cole says he often finds that startups don’t have the money required to get a patent—which can run in the thousands of dollars—and so they take a chance they can’t afford. For one recent client, Cole was able to work out a payment plan for a $30,000 patent application, which gave the startup a stronger negotiating position. The end result was a funding round of $1 million, which the company would probably not have received without owning the patent.
What else should a startup have when seeking funding? Cole advises some key items include, in addition to a patent (if applicable):
- Tax returns
- Track record for proof of concept—have you sold your product before, and for what result? What proves that there’s a market?
- Goals—specific, and based on your track record. A good example, Cole says, is if you have an order for thousands of product, and you just need the investment to pay for production.
- Management team—transparency on the team that will make your goals achievable and why; a VC likes to see that you have an attorney advising you, an accountant making sure the numbers are correct, a marketing person who can achieve your targets, etc.
“The investor wants you to succeed,” says Cole. “That’s how they get the return on their investment. But you have to show them that you can make that happen.”
A common problem for startups, Cole says, is that it’s most people’s inherent nature to trust and think “everything will work out.” It’s important to have agreements in writing so there’s no misunderstanding, he explains.
“I once saw a startup take a $10,000 loan as they were starting out—at least they thought it was a loan—but they signed an agreement that said that $10K entitled the lender to 10% of the company,” says Cole. “That company just received $50 million in Series C financing, so if we hadn’t been able to change that agreement, the lender would now own $5 million of that company—for a $10K loan.”
That investor is an example of what Cole likes to call a “Vulture Capitalist.” Those are the types of investors who see a good idea and swoop in to take advantage of a company before it is ready for investment; it doesn’t own the patents and have the intellectual property protections it needs.
“They’re feasting on the young and uneducated,” says Cole. “They’ll tell you things like ‘You can’t do this without us,’ ‘You need this money to survive.’ And then a startup takes money prematurely.”
To avoid “Vulture Capitalists”, Cole says to beware of investors who say things like:
“We don’t need a non-disclosure agreement—trust me.”
“We’re the only option here.”
“You can’t do this without us.”
This is where an attorney can be especially useful, Cole says. “You can tell them, ‘My attorney requires a non-disclosure.’”
Cole advises that startups should run as long as possible without VC money, because that puts them in a stronger position to negotiate.
“If you’re looking for the investment for anything other than scaling the business, investors are going to be skeptical,” he explains. “If you’re losing money and looking for an investment to keep the business going, why should the VC invest?”
For more tips and advice on how to grow your startup, visit Blytheco’s new Startup Resource Center, where you’ll find a wealth of information on finance, management, technology and more.